The Digital Economy
Digital taxes or fair taxation: what do policymakers really want?
Matthias Bauer / Mar 2018
The way EU policymakers promote plans for taxing digital corporations should give us cause for reconsideration. The current political campaign for a special tax on digital business models is bold. But rather than being based on facts, it seems to be guided by the overarching objective to manifest citizens’ perception that digital companies don’t pay their “fair share of tax”.
Communication always matters. But in politics reiteration really does the trick. The European Commission, currently backed by the governments of Germany and France, argues that digital companies do not pay taxes in the EU. In its official communication from September 2017 on “A Fair and Efficient Tax System in the European Union for the Digital Single Market”, the Commission argues that in the EU, digital companies show average tax rates between 8.5 and 10.1 percent. The numbers are presented in an eye-catching info chart with bubbles depicting a “high” gap to traditional business models which, as it is claimed, show tax rates of 20.9 and 23.2 percent respectively.
Ever since this Communication was published by the Commission, its communications experts repeatedly tweeted these shocking numbers – backed by bubble charts, but also info videos and interventions by high level officials, calling for a special tax regime for digital companies. A closer look at the tax rates disseminated by the Commission shows that the numbers are constructed. More precisely, they are mere estimates based on some hypothetical investment project and a number of theoretical assumptions about pre-tax rates of the return of a hypothetical investment, real interest rates, and different depreciation rates for a limited number of asset classes.
At ECIPE, we tried to shed light on the maze of international taxation. It turns out that it is hard to find data about what digital and non-digital companies really pay in taxes country by country. However, annual reports give us an idea about what digital and traditional – we shall say less digital – companies really pay in taxes on their pre-tax profits. It turns out that the average effective tax rate of traditional (EuroStoxx 50) corporations was 27.7 percent (5y average for the period 2012 to 2016) and therefore considerably higher than the numbers depicted by DG TAXUD for the EU (this gap itself is an issue to debate). Most notably, however, the real average corporate tax rates of large (and very well-known) digital companies and less renowned digital companies (MSCI Digital Services) were 26.8 percent and 29.4 percent respectively for 5y averages. In other words, the hypothetical numbers wholeheartedly promoted by the European Commission and high-level officials, underestimate real effective tax rates of digital companies by about 20 percentage points.
Importantly, there is no systematic difference in the tax rates of digital and traditional, less digital companies. The averages are very much the same, with digital companies even showing slightly higher effective corporate tax rates. Real world financial data also demonstrate that there are traditional companies that actually show tax rates in the range of 20 percent. At the same time, there are large digital corporations paying some 50 percent in taxes on their pre-tax profits, partly because of double taxation. We did not look into individual companies’ profit shifting activities. Why? Because all of them – traditional and digital companies, large ones and small ones – engage in profit-shifting, and it is hard to mine solid tax data. But this is exactly what evidence-based policymaking requires. And for tax international tax reforms, this would be real data about what companies really pay in taxes at EU Member State level and outside the EU.
Yet, policy-based evidence-making still seems to be the only game in town for those pushing for a digital tax. Bruno Le Maire, the French Finance Minister, said early in March that “[w]e simply can’t go on with Internet giants making huge profits in European countries and paying ridiculously low amounts of taxes because it is not fair,” arguing it would be “vital that Europe acts and adopts an efficient and rapid solution by the end of 2018.” Otherwise, the Minister postulates “[c]itizens won’t understand if we don’t.” In part, this is understandable. From the very beginning, the whole narrative behind this political campaign has been framed in a deceptive way. It goes without saying that for a complex matter such as international taxation, it’s rather the other way round: citizens don’t understand if we won’t. And some EU policymakers seem to be well aware of that.
There is indeed a good case to make for fair taxation. Uneven effective tax rates can distort competition and lead to smaller tax revenues. However, those that are calling for higher taxes on one particular group of firms – digital businesses – have yet to present the evidence for why that is motivated by principles of fair taxation. The OECD’s digital economy group, who looked at this same issue for more than two years, concluded that it was in fact impossible to put a fence around the “digital economy”, which is increasingly becoming the economy itself. So, after all, it is difficult to make sense of this debate – and the actual proposals. However, there might by other forces at play here. In Germany, the preliminary coalition agreement of January 2018 between Germany’s Social Democrats and the Christian Democrats explicitly outlines the parties’ joint objective to tax “Google, Apple, Facebook and Amazon”. Against this background, the digital tax initiative of the European Commission appears in a very different light. It’s obviously not driven by principles of tax fairness, but seems to be guided by some Member State governments’ appetite for discriminatory industrial policies as political leverage against the United States and other countries that are home to competitive digital businesses.